Value investing is one of the best investment strategies that individual investors can pursue to beat the market in the long run. Even though the stock market was pretty stagnant during the past 10 years, value investors were able to return around 7 percent per year.
We think investors could even do better by focusing on value stocks that hedge funds find attractive and invest significant sums. Hedge funds leave less to chance than most investors. They go great lengths to get an "edge" over ordinary investors. Hedge fund managers also have the resources to do extensive research on public companies and they have access to experts who can guide them. We compiled the holdings of 300+ hedge funds and picked their favorite value stocks. We obtained price-to-earnings and price-to-book value ratios from Google Finance. The stocks in this list trade below their book value. Here are hedge funds' most favorite value stocks:
Company | Ticker | P/B Ratio | % Owned | Value (x1000) |
Assured Guaranty Ltd. | 0.81 | 29.4% | 904,505 | |
Validus Holdings, Ltd. | 0.89 | 20.2% | 638,080 | |
Hartford Financial Services | 0.6 | 14.3% | 1,634,616 | |
Everest Re Group, Ltd. | 0.77 | 13.4% | 635,990 | |
Allied World Assurance Co | 0.76 | 13.0% | 295,352 | |
Transatlantic Holdings, Inc. | 0.67 | 12.7% | 359,736 | |
Legg Mason, Inc. | 0.87 | 10.5% | 510,760 | |
Loews Corporation | 0.94 | 10.0% | 1,682,974 | |
Capital One Financial Corp. | 0.93 | 8.6% | 2,090,296 | |
Citigroup Inc. | 0.73 | 8.5% | 9,850,069 | |
Cincinnati Financial Corp | 0.97 | 8.1% | 392,665 | |
Unum Group | 0.92 | 7.1% | 558,982 | |
Assurant, Inc. | 0.79 | 7.0% | 245,668 | |
Alterra Capital Holdings Ltd. | 0.86 | 6.9% | 164,424 | |
Morgan Stanley | 0.76 | 6.4% | 2,285,113 | |
KeyCorp | 0.89 | 6.3% | 489,875 | |
Computer Sciences Corp | 0.82 | 6.2% | 377,176 | |
MetLife, Inc. | 0.89 | 6.1% | 2,767,051 | |
Erie Indemnity Company | 0.56 | 5.4% | 185,884 | |
Fifth Third Bancorp | 0.99 | 4.8% | 547,361 | |
Goldman Sachs Group, Inc. | 1 | 4.2% | 2,992,909 | |
JPMorgan Chase & Co. | 0.99 | 4.2% | 7,027,379 | |
CME Group Inc. | 0.94 | 3.6% | 668,075 | |
Lincoln National Corp | 0.71 | 3.5% | 312,399 | |
Reinsurance Group of America | 0.91 | 3.5% | 161,840 | |
Axis Capital Holdings Limited | 0.72 | 2.9% | 123,256 | |
ACE Limited | 1 | 2.4% | 558,650 | |
American Financial Group | 0.83 | 1.9% | 68,764 | |
The Allstate Corporation | 0.88 | 1.7% | 278,180 | |
Prudential Financial, Inc. | 0.95 | 1.7% | 494,907 | |
Great Plains Energy Inc | 0.98 | 1.6% | 46,471 | |
Bunge Limited | 0.94 | 0.8% | 85,496 | |
American National Insurance | 0.57 | 0.7% | 15,335 | |
CNA Financial Corporation | 0.74 | 0.6% | 46,114 | |
Deutsche Bank AG (USA) | 0.77 | 0.0% | 1,303 |
Assured Guaranty is the most popular value stock among hedge funds. Nearly 30% of its outstanding shares are owned by the 300+ funds Insider Monkey tracks. Collectively these funds invested $904 Million at the end of March. Wilbur Ross had $239 Million, Ric Dillon's Diamond Hill Capital had $101 Million, and Louis Bacon's Moore Global Investments had $99 in AGO at the end of March. There were 18 other hedge funds with AGO holdings.
Validus Holdings is the second most popular value stock with 20.2% hedge fund ownership. The stock has a PE ratio of 12, PB ratio of 0.89, and a dividend yield of 3.1%. There were 20 funds with VR holdings at the end of March. Steven Klinsky's New Mountain Capital and Robert Pitts' Steadfast Capital had the largest holdings in VR.
We ranked value stocks based on hedge funds' ownership percentage. However, this isn't fair to mega-cap stocks with $100+ billion in market value. If we had ranked based on dollar amount invested in each stock, Citigroup would have been the most popular stock. There were 96 funds with Citigroup holdings at the end of March. They invested a total of $9.9 Billion in C. John Paulson's Paulson & Co had more than $1.8 Billion in Citigroup at the end of March. Bruce Berkowitz's Fairholme and Randall Smith's Alden Global Capital had more than $1 billion in C as well. Bill Ackman's Pershing Square had nearly $650 Million in C.
JP Morgan was the second most popular value stock in terms of dollar amount invested. There were 83 hedge funds with JPM holdings at the end of March. These hedge funds collectively invested more than $7 Billion. Steve Heinz's Lansdowne, Jonathan Jacobson's Highfields Capital, and Andreas Halvorsen's Viking Global are among the hedge funds with huge JPM positions.
We believe investors can achieve above market returns in the long run by investing in these value stocks. Investing in these stocks might not provide enough diversification though. A majority of these stocks are financials.
